On the US government shutdown and budget standoff

[John]

Hi,

Just a quick note, in case anyone was interested, with my views on the recent political stoush in the USA over the budget and the current "shutdown".

I don't watch the mainstream media much, but people are telling me there's quite a bit of panic and concern that things will go to hell fast if the shutdown is not resolved soon.

There is also a lot of talk about the US government "defaulting" on its debt obligations. This is panicking a lot of commentators.

My view is that this is all mostly a storm in a teacup (albeit a slightly larger teacup than usual). At the heart of my view is that important fact that the USA can only ever truly default on it's debt obligations via an intentional (and extremely ridiculous and shortsighted) human decision to do so. Otherwise, it can always print more money to repay its obligations. Printing money causes it's own problems (including inflation) but that's not an immediate concern with regard to the shutdown.

According to my research, these fears are largely unfounded. Here's why:

1. It has to be understood that this fundamentally a political matter. It's a case of politicians being unable to agree on a budget. It is NOT a case of the USA being unable to pay it's debts. By virtue of the fact mentioned above, the USA always and forever has the capacity to repay its debts.
2. My educated guess is that it's highly likely that politicians will find agreements over the coming days/weeks as pressure increasingly mounts to "get on with it". 
3. Even if there is a protracted shutdown, it is highly unlikely that the politicians would actually be prepared to let the US government default on it's debt obligations.
4. Even if the politicians were stupid enough to force a debt default (by inaction) then it is highly unlikely to trigger a financial crisis in the US debt market because the financial markets know full well that it's is only a technical default for political reasons with an effective 100% probability of being resolved. The negative immediate and shorter term effects of the shutdown only increase the chance of resolution because the politicians involved in the standoff will be seen as responsible for these consequences and pressure will mount to find a way to settle the political disagreement.

One thing this whole stoush does highlight is that it reinforces my view that the USA entrenched on a path of profligate government spending, stimulus and financial manipulation to such an extent that is very likely beyond the "point of no return". I expect that it is near impossible to revert from this course by any other means than a serious financial (and political) crisis some point down the track. However, I expect this particular "shutdown" is not the one that will trigger it. 

I don't want to get into party politics, but you can be sure the Democrats certainly aren't going to reign in spending. However, if you think the Republicans will fix the US Federal Government's finances, I think you'll be sorely disappointed. They talk tough now, but if they were in power I expect they will do little more than fiddle at the margins.

Cheers

John